ETFs churning most cash ever as $47 billion flows to market

Funds that specialize in U.S. stocks received $12 billion in October after $14 billion last month. The SPDR S&P 500 ETF Trust had the biggest inflows at $6.7 billion last month. The iShares Russell 2000 ETF absorbed $2 billion, and the iShares MSCI Emerging Markets ETF received $4.5 billion, data compiled by Bloomberg show.

The SPDR, the largest ETF with a market cap of $158 billion, saw $14 billion come out in August after $13.8 billion was added in July. It was the biggest swing in assets since the beginning of 2008, according to data compiled by Bloomberg.

ETFs have been gaining momentum as the stock market surged. In 2013, shares of more than 450 companies have risen, the most since at least 1990, data compiled by Bloomberg show.

Assets in U.S. ETFs have almost tripled to $1.5 trillion in the last five years, according to data from the Investment Company Institute, a Washington-based trade group. About $284 billion was drained from actively managed mutual funds in the same period, data from Morningstar Inc. show. Unlike mutual funds, ETFs, the vast majority of which are pegged to indexes, can be traded throughout the day like stocks.

Greater Influence

“There’s no doubt that ETFs have greater influence than before, and the swings in the ETFs are indicative of general market feelings,” Nick Sargen, who oversees $45 billion as chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in an Oct. 16 phone interview. “They become the market.”

ETF inflows were similarly strong when the S&P 500 was peaking in October 2007. In the four months leading up to the record on Oct. 9 of that year, they attracted more than $54 billion. Money continued to go in even as the equity gauge floundered through the end of the year, with another $65 billion coming in through December, data compiled by Bloomberg show.

Now that the S&P 500’s rally since March 2009 has lasted longer than the average bull market since World War II and corporate earnings growth is slowing, investors shouldn’t expect to make the same kind of easy money, according to Eric Marshall, who oversees $1.4 billion as president and portfolio manager at Hodges Capital Management.

Blindly Investing

“The past strategies of just blindly investing in the ETFs and index funds may be a little bit more challenging,” Marshall said in a phone interview from Dallas. “You really need to go out there and find these pockets of opportunity.”

Earnings growth for the S&P 500 slowed to 2.5% last quarter, according to analyst projections, after averaging 4.2% since the start of 2012. That’s a fraction of the 28% mean for 2010 and 2011, data compiled by Bloomberg show.

S&P said last week the impact of the budget impasse had shaved at least 0.6% off fourth-quarter growth, taking $24 billion out of the economy. The ratings agency forecast 2% annualized growth, down from the 3% seen last month. Fitch Ratings put the government of the world’s biggest economy on watch for a possible credit downgrade.

“After this drama with this past shutdown is over, people will have to focus on fundamentals, and that’s earnings, holiday sales and the impact of the debt negotiations on the economy,” Matt McCormick, who helps oversee $10.1 billion as a portfolio manager at Cincinnati, Ohio-based Bahl & Gaynor Inc., said by phone Oct. 16. “All of that is going to be less than stellar.”